Thus contract loss lifts C&W's takeover hopes

Cable & Wireless received a boost in its bid to persuade Thus to come to the table and start takeover talks, with news yesterday that its Glasgow-based rival has lost a flagship deal with BSkyB.

The loss of the multimillion-pound contract to BT comes ahead of C&W's self-imposed deadline of Monday, by which time, it has said, it will make a formal offer for Thus or walk away, having seen its initial, tentative approach rebuffed in May.

BT's three-year contract to provide Sky customers with home phone services is worth between £200m and £300m in revenue, but Thus stressed yesterday it had not expected to retain the deal and that its loss "will have minimal impact" on profits and cashflow. Coming just days before the C&W decision, however, news that Thus has lost such a high-profile long-term client is a blow to the reputation of the company and chief executive, Bill Allan.

C&W approached Thus in May with an offer of 165p a share, valuing it at £300m. The board said this undervalued it. Since then, however, several Thus shareholders are understood to have approached C&W to say they would like a cash return on their investment in the business, which in nine years as a public company has never made a profit or paid a dividend.

C&W's initial approach has been seen by many in the City as a low-ball bid. An indication of an offer at 175p to 185p would likely force the Thus board to the table. At those sorts of levels, Thus would be valued at between £320m and £340m.

Philip Rogerson, Thus chairman, has been in no rush to enter talks because of a letter he received from his opposite number at C&W, Richard Lapthorne. In the June 4 letter, Lapthorne said he was willing to seek agreement with the Thus board within a "narrow price band". The board of Thus has taken this to mean C&W is unwilling to significantly raise its offer.

C&W is reviewing its options ahead of Monday's deadline but advisers say it has no appetite to go hostile and take an offer direct to shareholders. A protracted takeover battle would distract management from the main focus of working on a possible demerger of C&W's international assets from the rest of the business.

Instead, C&W remains hopeful that Thus shareholders will pressurise its management team to the table - the loss of the Sky deal may provide further impetus.

Under its deal, BT will provide Sky with a wholesale voice service for its 1.1 million Sky Talk customers. Sky's customers will move to the BT platform over the next few months.

Delia Bushell, Sky's director of broadband and telephony, said: "In the last year alone, over 740,000 new customers have joined Sky Talk for great value calls. This deal with BT will maintain our quality of service and ensure we enjoy increasing cost efficiencies as we continue to grow the service."

Brian Fitzpatrick, managing director of BT wholesale markets, said: "In the highly competitive communications industry, providers are looking for ways to improve cost efficiencies. Our announcement with Sky is further evidence that BT Wholesale is the ideal partner to realise value as quickly as possible."